Iowa expected to take in less revenue next year than it's spending this year

Iowa’s state revenue is expected to decline by about $1 billion over a two-year period because of major tax cuts signed into law by Gov. Kim Reynolds, according to Iowa’s revenue forecasters who met Thursday.

The state took in about $9.8 billion in the most recent fiscal year that ended in June. In fiscal year 2026, revenue forecasters are projecting the state will bring in $8.7 billion. That is less than the $8.9 billion the state is spending on government services this year.

Kraig Paulsen, director of the Iowa Department of Management, said he does not see that as a problem because there is a $1.9 billion budget surplus to work with. He said there is also a projected $3.7 billion in the taxpayer relief fund.
 
“The tax cuts are having the intended effect,” Paulsen said. “They’re leaving more money in Iowans’ pockets, and they’re leaving more money in the pockets of Iowa’s employers.”

Democrats disagreed.

“Iowa’s revenues are declining,” said Sen. Janet Petersen, D-Des Moines. “Most Iowans aren’t feeling any positive effects from the Republican majority’s budgeting. Republican lawmakers’ and Gov. Reynolds’ priorities put private school vouchers and corporate tax giveaways ahead of our kids in public schools, seniors in nursing homes and tax relief for working families.”

Tax cuts are 'working as designed'

In 2022, Reynolds signed a law to phase the personal income tax down to a single rate of 3.9%, eliminate state income taxes on retirement income and cut the corporate tax rate.

This year, the Legislature sped up those income tax cuts to enact a single personal income tax rate of 3.8% starting in January 2025. Now, those changes are having a big impact on state revenue estimates.

Reynolds said the tax cuts are “working as designed.”

“As I’ve said, the government has been taking in too much taxpayer money,” she said. “We fixed that by cutting taxes and taking in less. That means Iowans get to keep more of what they earn, and that’s how it should be. Our state’s fiscal health remains strong, and Iowa’s economy continues to grow.”

The estimates show a 5.3% drop in revenue for fiscal year 2025 and a 6.3% drop in fiscal year 2026. That is a big change from the previous two years, which saw revenues decline and grow by less than 1%.

Democrats say it's 'unsustainable'

Jennifer Acton, fiscal director for the nonpartisan Legislative Services Agency, said the revenue decrease is expected — “despite solid economic conditions” — because of the deeper tax cuts that will take effect.

Petersen said the significant drop in revenue is projected at the same time that the income cap will be removed from Iowa’s tax-funded Education Savings Accounts that help families pay for private school tuition.

“Their private school voucher scheme is growing, and the state’s revenues are declining,” Petersen said. “That’s not a winning combination.”

Paulsen, Reynolds’ budget director, said Iowa’s budget surplus and the taxpayer relief fund combined with Iowa’s economic growth means even more tax cuts could be possible. Reynolds has said her goal is to eliminate the state income tax by the end of her current term in office in early 2027.

Rep. Timi Brown-Powers, D-Waterloo, said Iowans are facing layoffs and rising costs.

“Today’s negative revenue projections confirm what most Iowans feel: the Reynolds economy is not working for everyday people,” she said. “Tax breaks for corporations and the wealthy combined with vouchers have created an unsustainable budget while costs keep rising for Iowa families.”

Paulsen said there is still a lot of uncertainty because of the federal elections and what the next Congress and president decide to do about federal tax cuts that are set to expire. He said that decision will affect Iowa’s revenue, too.

The Revenue Estimating Conference will meet again in December to produce a revenue estimate that Reynolds can use to propose a budget for fiscal year 2026.